Motley Fool 9/22/2013

Q: I recently noticed that a certain mutual fund’s top holdings included some solid dividend-paying companies. Would you please explain where those quarterly dividends go? Do the companies pay those dividends to the mutual fund managers? — K.W., Tulsa, Okla.

A: When a mutual fund owns shares of a dividend-paying stock, the dividends paid belong to the shareholders, not fund managers.

Typically, when you first invest some money in a fund, you’ll be asked to specify whether you’d like to receive the dividends as cash payments or have them reinvested in additional shares of the fund.

After a fund receives dividends and before it distributes them to shareholders, the dividends’ value is added to the fund’s net asset value (NAV). Later, the NAV is reduced to reflect the departure of accumulated dividends.

So don’t be alarmed if you see a fund suddenly drop in value one day — it might simply mean that a large distribution was made.

Q: Is this a good time to start contributing to a 401(k) account at work? — S.N., Gainesville, Fla.

A: It’s almost always a good time. When it comes to retirement, most of us should be regularly saving and investing, without much regard for the state of the economy. As we’ve been digging out of a recession recently, now is far from the worst time to invest.

Many of us should be saving and investing aggressively, too, not just socking away 3 percent of our salaries. Crunch some numbers and see how much you’ll need in retirement and how much you’ll need to save. You might need to sock away 10 percent or even 20 percent or more of each paycheck. Consider a broad-market index fund for long-term money.

Fool’s School

Stocks are for kids

What better gift can you give your children than a nudge toward financial independence? It’s rarely too early to introduce them to investing. With decades ahead of them, they can reap great benefits from the magic of compounded growth. Here are some ideas to help you play and learn together:

(1) Build a mock portfolio. Have your kids list companies that interest them. If they look around their home, classrooms, the mall and on TV, they’ll see firms such as Nike, Microsoft, Coca-Cola, Apple, Walmart, McDonald’s, Disney, American Eagle Outfitters, PepsiCo, Boeing and Johnson & Johnson. (The Motley Fool owns shares of some of these, and its newsletters have recommended most, too.)

Have them list a dozen companies, with ticker symbols, current stock prices and today’s date. Every day or week, have them record the latest prices. Calculate the gains or losses regularly. Such short-term stock price movements aren’t terribly meaningful, but they can help a child understand how the market works. (If you help them open an online portfolio at finance.yahoo.com or elsewhere, tracking their holdings will be easy.)

(3) Eventually, help your child actually invest. You can open a custodial brokerage account, or you might informally “sell” some of your own shares to your child. Once your child turns 18, she can open her own brokerage account.

Help your kids get started. Your teens (and clever preteens) can learn more at teenanalyst.com, brassmagazine.com, and in our book, “The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of,” by David and Tom Gardner with Selena Maranjian (Touchstone, $16). Peter Lynch’s “Learn to Earn” (Simon & Schuster, $15) is also good. Check out the Secret Millionaires Club, too, at smckids.com. It offers videos and features Warren Buffett.

My Dumbest Investment

Swung to a loss

I tried my best at swing trading. At the very best, I could stay even, but at times it was terrible. I eventually put my funds into corporate bonds and have recovered. — S.H., online

The Fool responds: Swing trading is generally defined as investing in something (such as a stock) for a few days, hoping to profit from a change, or “swing,” in the price. It’s not as extreme as day-trading, where stocks are often held for just minutes or hours, but it’s not a much more sound approach, either.

Like many day traders and others, swing traders tend to employ “technical analysis” of securities. Thus, instead of, say, studying the company behind a stock to evaluate its financial health, competitive position and growth prospects, a swing trader will just observe the stock price’s movements, looking for patterns and drawing conclusions from them.

Many of us at The Motley Fool see that as speculation. We prefer to buy-to-hold, investing in businesses via stocks, considering ourselves the part-owners that we become, and aiming to hold on for years, if possible, as long as the investment remains compelling.

Foolish Trivia

Name that company

Founded in 1970 and based in Kansas City, Mo., I’m a publisher and also the world’s largest independently owned newspaper syndication company, distributing content to print, online and mobile platforms. Brands under my roof have included Doonesbury, Dear Abby, Miss Manners, Calvin and Hobbes, Garfield, Peanuts, Dilbert, For Better or For Worse, Cathy, Ziggy and The Motley Fool. Each year, I publish the work of more than 240 syndicate creators and writers and more than 150 books. I’m also the nation’s top calendar publisher, selling more than 15 million calendars annually. Oh, and greeting cards, too. Who am I?

Last week’s trivia answer

I was founded in Arkansas in 1935 by a guy whose name I bear. He began by delivering chickens in the Midwest, and today I’m one of the world’s largest food production companies, processing and marketing chicken, beef and pork. I even offer pizza toppings and tortilla chips. In 2012, my sales topped $33 billion and my average weekly production was 41 million chickens and 400,000 pigs, among other things. I serve customers in about 130 nations and employ 115,000 people in more than 400 facilities. My brands include Corn King, Holly Farms, Bonici, Wunderbar and Weaver. Who am I? (Answer: Tyson Foods)

The Motley Fool Take

Google’s growing

Recently sporting a price-to-earnings (P/E) ratio near 25, a market value close to $300 billion and a stock price north of $800, Google (Nasdaq: GOOG) might seem like a stock too richly valued.

Think again, though, as the company still has much room for growth. For one thing, look at its growth rates, as revenue has averaged 21 percent growth over the past five years, and earnings by about 19 percent. Over the next year, analysts expect Google to grow by nearly 18 percent, and by more than 14 percent over the next five years.

Google is perfectly primed to mint money in our increasingly mobile future as its Android operating system has become the global standard in mobile computing.

Its profit margins are likely to take a hit as it adds more hardware revenue from smartphones, tablets and laptops, in part due to its acquisition of Motorola. But it remains the global king of searches and a leader in online advertising.

The company’s innovation holds much promise, too — just think of its Gmail, Google Maps and Chrome browser.

It’s working on self-driving automobiles now, and launching high-speed Internet and television service in some cities.

Considering how rapidly Google is growing, its stock seems at least fairly valued, if not rather attractively valued. Give it some consideration for your long-term portfolio.